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Good credit gives sector licence to print money

De Montfort University is reportedly on the verge of issuing a £120 million public bond, after ratings agency Moody's gave it a high credit rating based on a belief that the government would bail out any failing university.

Moody's says in a report published on June that it assigned the second-highest debt rating - Aa1 - to De Montfort University's proposed bond issuance.

It adds that the rating incorporated its "assessment of a strong regulatory framework for English universities and of a very high likelihood of extraordinary support from the UK government...in the unlikely event of DMU experiencing acute liquidity stress".

Such an implicit taxpayer guarantee indicates that the financial markets may see universities as "too big to fail" and the resulting good credit ratings could mean that bonds may prove an attractive way of borrowing for investment.

Some universities are already finding long-term bank finance harder to come by and public funding for capital projects is falling. In such a difficult financial climate, bonds can deliver large sums of money at relatively low, fixed rates of interest.

Meanwhile, the lender - often a body such as an insurance company or pension fund - can secure an annual, fixed interest payment over the duration of the bond.

Bob Rabone, vice-chair of the British Universities Finance Directors Group and director of finance at the University of Sheffield, said: "There has been some interest [in bonds]. I had a meeting recently with banks who are saying the market is right.

"They made a parallel between higher education and the housing association sector, which is where there has been more activity in recent months, I understand."

Mr Rabone said he understood there were "interested parties willing to put up funds".

A Cambridge spokesman said there was "nothing further to report at the moment".

Moody's warns in its report on De Montfort that sector issues could harm the university's credit rating, which could make the bond more costly in future.

"Deteriorating operating performance due to missteps in cost adjustments and/or an inability to manage in the face of new dynamics in funding and student demand could negatively impact the rating," it says.

Times Higher Education contacted De Montfort to verify the Moody's report and ask what the bond would finance, but the university would not comment.